Two Institutional Traders Speak Out About High Frequency Trading

Clifford S. Asness, Michael Mendelson at AQR Capital Management write in WSJ:

A few nights ago, CBS’s “60 Minutes” provided a forum for author Michael Lewis to announce that Wall Street is “rigged” and for the sponsors of a new trading venue called IEX to promise to unrig it. The focus of the TV segment was high-frequency trading, or HFT, an innovation now over 20 years old.

The stock market isn’t rigged and IEX hasn’t yet generated a lot of interest. In our profession, what we saw on “60 Minutes” is called “talking your book”—in Mr. Lewis’s case, literally.

The onslaught against high-frequency trading seems to have started about five years ago when a blogger made a wildly exaggerated claim about one firm’s HFT profits. Nowadays after any notable market event, and again last Sunday for no reason other than a book launch, the world gets bombarded with arcane details and hyperbolic assertions about HFT strategies. If you find the discussion overwhelming, we have some good news: The debate can be understood without knowing how equity orders are routed, matched or canceled.

Few professionals completely understand the details of market microstructure. Rather, when someone has a strong opinion about the subject, it’s likely to be what they want you to believe, not what they know.

Our firm, AQR Capital Management, is an institutional investor, primarily managing long-term investment strategies. We do not engage in high-frequency trading strategies. Here is where our interest lies: What is good for us is lower trading costs because it translates into better investment performance and happier clients, which makes our business slightly more valuable.

How do we feel about high-frequency trading? We think it helps us. It seems to have reduced our costs and may enable us to manage more investment dollars. We can’t be 100% sure. Maybe something other than HFT is responsible for the reduction in costs we’ve seen since HFT has risen to prominence, like maybe even our own efforts to improve. But we devote a lot of effort to understanding our trading costs, and our opinion, derived through quantitative and qualitative analysis, is that on the whole high-frequency traders have lowered costs...

One of the biggest headline-grabbing worries about HFTs is how fast the trades are conducted. The speed sounds unnecessary, dangerous and possibly nefarious—”These guys care about the speed of light!” For the most part, though, HFTs don’t need that super speed to get ahead of the little guy or even institutional traders, but to get ahead of other HFTs. Some of the loudest complaints about high-frequency trading come from the slower traders who used to win the races.

Afghanistan has a Trillion Dollars in Minerals, Why the Leak Now?

The United States has discovered nearly $1 trillion in untapped mineral deposits in Afghanistan, far beyond any previously known reserves and enough to fundamentally alter the Afghan economy and perhaps the Afghan war itself, according to senior American government officials, NYT reports.

NYT goes on:

The previously unknown deposits — including huge veins of iron, copper, cobalt, gold and critical industrial metals like lithium — are so big and include so many minerals that are essential to modern industry that Afghanistan could eventually be transformed into one of the most important mining centers in the world, the United States officials believe.

An internal Pentagon memo, for example, states that Afghanistan could become the “Saudi Arabia of lithium,” a key raw material in the manufacture of batteries for laptops and Blackberries.

The vast scale of Afghanistan’s mineral wealth was discovered by a small team of Pentagon officials and American geologists. The Afghan government and President Hamid Karzai were recently briefed, American officials said.

As NYT notes, this could play out many ways:

...the American officials also recognize that the mineral discoveries will almost certainly have a double-edged impact.

Instead of bringing peace, the new found mineral wealth could lead the Taliban to battle even more fiercely to regain control of the country.

The corruption that is already rampant in the Karzai government could also be amplified by the new wealth, particularly if a handful of well-connected oligarchs, some with personal ties to the president, gain control of the resources. Just last year, Afghanistan’s minister of mines was accused by American officials of accepting a $30 million bribe to award China the rights to develop its copper mine. The minister has since been replaced.

Endless fights could erupt between the central government in Kabul and provincial and tribal leaders in mineral-rich districts. Afghanistan has a national mining law, written with the help of advisers from the World Bank, but it has never faced a serious challenge.

“No one has tested that law; no one knows how it will stand up in a fight between the central government and the provinces,” observed Paul A. Brinkley, undersecretary of defense and leader of the Pentagon team that discovered the deposits.

At the same time, American officials fear resource-hungry China will try to dominate the development of Afghanistan’s mineral wealth, which could upset the United States, given its heavy investment in the region. After winning the bid for its Aynak copper mine in Logar Province, China clearly wants more, American officials said.

 It is interesting that this is being leaked to NYT at this time. The NYT story puts heavy emphasis on this being a new discovery by the U.S., but in the same story explains that the Russians were geologically mapping the heavy mineral area, when they were in the region:

In 2004, American geologists, sent to Afghanistan as part of a broader reconstruction effort, stumbled across an intriguing series of old charts and data at the library of the Afghan Geological Survey in Kabul that hinted at major mineral deposits in the country. They soon learned that the data had been collected by Soviet mining experts during the Soviet occupation of Afghanistan in the 1980s, but cast aside when the Soviets withdrew in 1989.

Is this the real reason behind the U.S. going into Afghanistan?

One has to wonder, and this is pure speculation, that the U.S. is possibly trying to head off a dump by Wikileaks of cables which openly discuss the huge mineral deposits, since it appears Wikileaks is in possession of a lot of cables out of that region. Such a cable dump would be extremely embarrassing if it contained official cables discussing the vast resources without any public indication that such huge mineral resources existed in the region. Note that NYT also reports that the U.S. just recently briefed Afghan President Karzai. There is something driving this sudden transparency about the vast wealth in Afghanistan. My guess is that it is Julian Assange and his Wikileaks.

Sometimes It's the Small Things

I am a simple man. I have an ex-wife and a number of ex-girlfriends that can attest that if you keep me properly fed, there is much peace on the homefront. Whcih brings me to my experience at the Washington D.C. Hotel W that I am living through now.

Earlier this week, I had some nice things to say about the Afghan-American Chamber of Commerce. In particular, Chairman Ajmal Ghani A. and President Dr. Donald Ritter.

Since then, I have had the chance to see Ritter in action in a minor situation. My new take on him is that he is a pretty boy, all talk, no action.

Here was the scene at lunch today at the W Hotel during the conference. It was buffet style. About three quarters of the attendees got their food, when just about where I was in line, the hotel ran out of sandwiches. There were minor scraps of lettuce in the lettuce bowl, plenty of potato chips and tons of cookies. There were at least 75 people in line, so unless the conference officials way under reported the number of attendees, which was very unlikely since food was plentiful at all other servings, something was real screwy. Four sandwich trays, each three feet long, were empty.

We waited, and waited. Five minutes passed, a pretty much non-English speaking W employee came out and manged to blurt out, "It coming." Ten minutes passed, another pretty much non-English speaking employee told us, "We make." Where was senior W Hotel staff? I have no clue. They certainly weren't making sure this conference was going smooth

Finally, Ritter comes and sees the problem and looks around a little confused. To my amazement he just says, "Well, there are a lot of people in line, we are just going to have to move it along and eat vegetarian today."

I look at what is in front of me. There is a fruit tray with about 4 pieces of long sitting, long pushed around slices of pineapple. And a bunch of grapes. I grab the grapes and rip off half.

I am now writing this fueled on twelve grapes, a handful of potato chips and four petite type cookies.

As I munch my grapes, I am thinking about Ritter. Everyone at the conference is discussing how difficult it is to do business in Afghanistan, corruption concerns, security concerns, etc., and this guy literally can't get us ham sandwiches in a W Hotel.

Not impressive.

Sounds Like US Escalation in Afghanistan Coming

Vice President Joe Biden appeared this morning on CBS' "Face the Nation."

In response to a question from host Bob Schieffer, Biden said, "I hate to say it, but yes, I think...there will be an uptick [in American casualties]. Because as the commander in Afghanistan said, he said, 'Joe, we will get this done, but we're going to be engaging the enemy much more.'"

The Obama administration has "inherited a real mess," Biden said. "We're about to go in and try to essentially reclaim territory that's been effectively lost." The training of Afghan police and military personnel has been problematic, he said. "Some of our allies who have committed to train these troops did not do them well," Biden said.

Where the Taliban Gets Their Money

Jason Ditz writes:

The subcontractors responsible for moving NATO supplies from Karachi to the
forces in Afghanistan have reportedly paid millions of dollars in protection money, called the “Taliban Tax” by the Times, to keep militants from attacking them.

One company reported spending 25% of its security money to the Taliban,while another company is reportedly on such good terms with the militants that they send fighters to escort their convoys.

From Barack Obama's Speech in Berlin

"As we speak, cars in Boston and factories in Beijing are melting the ice caps..."

"...America cannot turn inward...No one welcomes war. I recognize the enormous difficulties in Afghanistan. But my country and yours have a stake in seeing that NATO's first mission beyond Europe's borders is a success...My country must stand with yours and with Europe in sending a direct message to Iran..."

"This is the moment when we must build on the wealth that open markets have created, and share its benefits more equitably."

There you have it, words from a member in good standing of the Greenie-Industrial Complex,the War Party and the Egalitarians.

Actually, it sounds like the man is a two war president. Escalating in Afghanistan and taking on Iran. Oh, he'll get us out of Iraq alright.

House Passes War Funding Bll

The House has passed a $162 billion war funding bill.

The bill will bring to more than $650 billion the amount provided by Congress for the war in Iraq since it started five years ago. Nearly $200 billion in additional funding has gone to operations in Afghanistan, according to congressional analysts.

A new GI Bll was attached and a 13-week extension of unemployment checks for those whose benefits have run out.

The new GI Bill essentially would guarantee a full scholarship at any in-state public university, along with a monthly housing stipend, for people who serve in the military for at least three years. It is aimed at replicating the benefits awarded veterans of World War II and more than doubles the value of the benefit — from $40,000 today to $90,000.